Reports are emerging that Government has indeed reverted to the 2014 two-tier mining tax regime which was abolished in the 2015 Budget. However, the mineral royalties will now be set at at 9 percent for both open-pit and underground mines. Reuters are quoting a “source in the presidency”.
The 2014 two-tier mining tax regime consists of the mineral royalty tax (now at 9%), corporate income tax and profit variable tax. Crucially it allows for capital allowances and carry forward of losses which substantially eliminates potential taxable profits.
Finance Alexander Chikwanda in February said the 2014 two-tier mining tax regime is “simply illusory as only two mining companies were paying Company Income Tax under the previous tax regime as most of them claimed that they were not in tax-paying positions”.
He also said that “before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell” companies which are not directly linked to the core business”.
We will need to see the projected figures from Mr Chikwanda. Our estimates is that if we go by current copper prices this reversal will get GRZ around $140m relative to the old 2014 two-tier mining tax regime (before the 2015 Budget). The figure is just under half of what was anticipated in the Budget 2015. Which probably may mean raising $160m through additional borrowing or dropping some projects.
The finances will inevitably get worse but it could be worse. Lungu has followed the Banda play book of ditching mining framework his predecessor, but he may argue that he has not gone back to square one. This change is also better than what HH recently proposed (comments on that in due course).
The more puzzling result is that underground mines are shouldering a greater burden under this arrangement relative to open pit mines. The incentives are now the wrong way round. But hopefully that should mean that PF will follow what we have all been saying, they need to produce a Green Paper for public consultation on mining rather than make policies on the hoof!
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